Navigating Tax Season Successfully: Essential Tips for Early Childhood Directors

Tax season can be a challenging time for many childcare centres. Navigating your tax filing status, understanding available credits and deductions, and organizing all financial records for the center are just a few of the tasks at hand. To help early childhood directors manage this critical financial period with confidence, here are nine essential tips to guide you through tax season.

Determine your tax filing status

Whether your early childhood centre operates as a for-profit or non-profit entity, the nature of your organization significantly influences the available deductions and shapes a tailored tax strategy. For-profit centres may focus on maximizing deductions for business expenses such as professional development or facility upgrades, while nonprofits need to navigate the specific requirements of maintaining tax-exempt status. Directors should take the time to understand how their organizational structure affects taxable income, eligible deductions, and reporting obligations. Seeking advice from a qualified tax professional or CPA with experience in the childcare industry can further enhance this process by offering insights into deductions, compliance, and strategic planning.

Explore available tax deductions

Maximizing tax deductions is an essential part of financial management for childcare owners and directors. Understanding the range of deductions available can significantly reduce taxable income for your childcare. Both deductions and credits offer valuable opportunities: deductions lower taxable income before calculating the tax owed, while credits (explored below) directly reduce the amount of tax due. For childcare providers, these opportunities extend to various business-related expenses. The below deductions may vary based on location and it is important to check with your local government websites such as Service Canada or the IRS.

Key deductible expenses for childcare centres may include:

• Supplies: Items essential to daily operations, such as art materials, cleaning supplies, and nap mats, can be claimed as deductions in the year of purchase. Keeping receipts is critical to ensure eligibility.
• Facility Costs: Expenses like rent, utilities, and maintenance directly related to operating the centre are deductible, helping offset the costs of maintaining a safe and welcoming environment for children.
• Vehicle Expenses: If your centre uses vehicles for field trips, errands, or other business-related activities, the associated mileage and parking fees may be deductible. Accurate records of business miles are essential for this deduction.
• Capital Purchases: Durable items such as cribs, furniture, and playground equipment fall under capital purchases. These are typically depreciated over several years rather than deducted in a single tax year.
• Meals: Childcare providers can deduct the cost of meals served to children, based on government-standard rates for breakfast, lunch, dinner, and snacks. Alternatively, you can deduct the actual cost of meals if higher, provided detailed documentation is maintained.
• Staff Salaries and Benefits: Employee wages, salaries, and benefits may be deductible as business expenses, recognizing the investment in staffing for the effective operation of your centre.
• Educational Materials and Supplies: Books, toys, and other learning aids necessary for creating a stimulating educational environment may be deductible.
• Business Fees: Fees related to licensing, banking, legal services, or professional memberships can also be claimed as deductions.

For home-based daycare providers, additional deductions may apply. If your home is used for business purposes, you may claim a portion of expenses like mortgage interest, utilities, insurance, and maintenance. State licensing or registration is generally required to qualify for these deductions, but exemptions or pending applications may also be eligible.

Other deductible expenses include advertising, insurance, internet, phone service, and professional development costs. Directors are encouraged to stay informed about these opportunities and consult with a tax professional or CPA to ensure all eligible deductions are claimed.

By leveraging these deductions effectively, childcare centre directors can reduce their tax liability, reinvest savings into their programs, and foster financial stability for their centres. Maintaining organized records and staying proactive about tax regulations is crucial for fully utilizing these opportunities.

Educate parents on child care tax credit 

Childcare providers play a pivotal role not only in nurturing children but also in supporting parents to comprehend and maximize available tax benefits. As taxpayers, many families may qualify for tax benefits such as the Child Tax Credit from the IRS, which offers a tax break on eligible expenses for families in the U.S with young children. In Canada, families may be eligible for the Canada Child Benefit, a government program designed to assist with the cost of raising children. Additionally, parents may be entitled to other tax deductions related to childcare expenses. By providing accurate tax receipts promptly, you help families maximize these valuable benefits while also improving their experience with your childcare center.

Childcare management software, such as Lillio, can play a vital role in streamlining record-keeping and enhancing communication of important financial statements with parents. With features like attendance management, providers can maintain transparent and organized documentation of services rendered, simplifying administrative tasks for both the childcare centre and the families it serves—especially when tax season arrives. By supporting parents in navigating tax credits and utilizing advanced software solutions, childcare providers not only contribute to the financial well-being of families but also enhance the overall efficiency and operation of their programs.

Employee payroll compliance 

Maintaining payroll compliance is a critical piece of responsible child care center management. It ensures operational efficiency, regulatory adherence, and fosters trust among employees and parents. Payroll compliance encompasses accurately tracking hours, calculating wages, withholding taxes, and ensuring benefits align with labour laws. Directors must stay informed about changes in employment regulations, such as minimum wage adjustments, overtime requirements, and tax updates, to protect their organization and its workforce from potential legal and financial penalties.

Effective payroll management also contributes to employee satisfaction within your center. Timely and accurate paychecks build trust and morale, creating a more engaged and motivated team. Furthermore, transparent payroll practices demonstrate professionalism and care, reinforcing a positive reputation for the childcare center among staff and families.

Advanced childcare tools like Lillio’s Billing and Payments software can be  valuable in managing payroll efficiently. Capabilities like automated time-tracking, multi-center support, and detailed reporting helps streamline your payroll processes. This technology reduces the risk of errors while also saving you time. Directors can also use these tools to generate essential financial documents for audits or end-of-year tax filings.

Stay Informed of Tax Laws

Childcare centres must adhere to various tax requirements at both the federal and regional levels, with obligations varying depending on their location and business structure.

In the United States, childcare businesses are required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This unique number is essential for tax reporting, hiring employees, and other financial operations such as opening business bank accounts. Federally, childcare centres are typically subject to income tax, and the specific filing requirements depend on the centre’s legal structure—whether it is a sole proprietorship, partnership, corporation, or other entity. Additionally, employment taxes, including social security and medicare contributions, must be withheld from employee wages and accurately reported.

At the state level, regulations differ significantly by jurisdiction. Many states require childcare centres to file an annual income tax return and comply with unique tax obligations specific to their region. Some states may also impose sales tax on certain childcare-related services or products. Staying informed about these regional requirements is critical to avoiding compliance issues.

In Canada, childcare centres must register with the Canada Revenue Agency (CRA) to obtain a business number (BN), which serves as an identifier for tax-related purposes. Depending on their operational structure, they may be required to charge and remit Goods and Services Tax (GST) or Harmonized Sales Tax (HST) on specific services, although many childcare services are exempt from GST/HST. Employers in Canada must also deduct Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax from employee pay and remit these amounts to the CRA.

Childcare centres in Canada must file annual corporate tax returns if they operate as incorporated entities, and unincorporated businesses must include their childcare earnings in their personal tax filings. Provincial regulations also come into play, with specific filing requirements and potential tax credits or incentives available to support childcare providers.

Keep things organized with a childcare management software 

Using a robust childcare management software like Lillio is essential for maintaining accurate records and ensuring a smooth tax season. Lillio’s billing and payments software not only organizes financial information for childcare business owners but also automates key tasks like record-keeping, tax-receipts and parent communication. By automating the creation and distribution of receipts, directors can ensure that both their team and the families they serve have easy access to accurate and timely documentation. This transparency not only enhances trust but also eliminates any last-minute scrambling for financial records. With Lillio’s childcare management software in place, early childhood directors can ensure an organized, efficient, and stress-free tax season for everyone involved.